Friday, April 29, 2016

“Hmmm... Do I have enough to go out to the movies tonight? Lemme think... I know I’m setting aside some money for emergencies, and I’m saving toward my first car, and something else... Can’t remember off hand. Oh well, I probably have enough...”

When all your money is in one account, it can be very difficult to keep your financial priorities organized in your head. Spending meddles with saving.

Show your kids a better way. Show them how to keep money compartmentalized. Divide it into separate buckets, each labeled for a specific purpose.

Start the habit early. For youngsters, those buckets might just be labeled jars or titled accounts in a family bank spreadsheet. Older kids might use separate prepaid cards or bank subaccounts.

Clearly bucketed money has a way of staying put until its intended purpose comes calling. Mixed up money has a way of wandering at the first opportunity.

Wednesday, April 27, 2016

“Dad, the Joneses have a trampoline. It’s awesome! Can we get one too? Plllleeaasse!!!”

Day 1. Indeed, awesome!

Day 10. Yeah, pretty fun.

Day 100. Meh...

The awesomeness of a fancy new “want” inevitably decays over time. In fact, the initial drop is often quite steep. Sometimes, it can crash from delightful to dull in just days.

The next time your kids ask for that shiny new thing, pull out the graph paper and plot a projection of its awesomeness over time.

Shade the area under the curve. That represents its lifetime value.

Things like trampolines often start high on the awesomeness scale, but descend rapidly. They’re just novelty items with a rapidly decaying fun factor.

On the other hand, things like ordinary bikes might start relatively low on the awesomeness scale. But if you ride your new bike every day, it delivers consistent long term value that ultimately exceeds that of the long abandoned trampoline.

So, focus your kids on buying things with lots of area beneath that value-over-time curve, especially when it comes to expensive items.

Does that mean your kids never get to enjoy a fancy want? Nope. As Mr. Money Mustache points out in today’s article, they just need to figure out how to extract that initial high value without paying for the low value long tail.

The upshot: buy the bike, but visit your friend’s house for the trampoline.

Teach your kids that making money and managing it are two very different skills. Just like offense and defense on the basketball court.

The stunning reversal-of-fortune stories profiled in today’s article serve as memorable cautionary tales from some of the highest paid NBA athletes of all time. The moral of each story: even the biggest salary can’t overcome bad money habits.

Here are just a few poster children on the NBA wall of financial shame:

Player

Earned

Blew It On

Result

Charles Barkley

$40M

A bad agent, compulsive gambling.

Broke after 4th year in NBA. Lost as much as $10M gambling. Has rebounded financially since.

Derek Coleman

$91M

Bad investments in Detroit.

Filed for bankruptcy in 2010.

Latrell Sprewell

$100M

Yacht, multiple million dollar homes.

Yacht seized, homes foreclosed.

Vin Baker

$100M

Bad investments, an entourage known to spend over $10K on a single meal, a pricey mansion.

Saturday, April 23, 2016

Net worth is a measure of your financial value. It’s a very important number to teach your kids how to calculate and track.

Here’s how you do it:

List the key things you own. List the current balances of any checking, savings, and investment accounts. List the trade-in value of your car if you have one. If you owned a home, you’d list its current market value. Leave out the little stuff, or things that can’t be realistically converted to cash.

Add all those numbers together. That’s your total assets.

Now list all the things you owe. These are typically loans of some form. Your current credit card balance. The amount owed on student loans or a mortgage.

Add all those numbers together. That’s your total liabilities.

Now subtract your total liabilities from your total assets. That’s your net worth.

To recap:

Net Worth = Total Assets - Total Liabilities

Some key observations to share with your kids:

You can have lots of fancy assets — a mansion, a beach house, a Maserati — and still have negative net worth. How? Big hefty loans to finance all those fancy possessions.

You can have very modest assets — a small bank account, no home, no car — and still have positive net worth. How? No loans, no debt.

Be sure to use a friendly tone, not an indignant one. You want to encourage communication, not scare it off.

Now you’ll have a few moments to gather your thoughts and think through an age-appropriate response. More importantly, you’ll gain some insight into the question behind the question. Is your child anxious about the family’s financial situation? Being teased by peers? Feeling inadequate? Jealous? Randomly curious?

Those answers may lead you to a very different conversation. And a more thoughtful, helpful one.

As Ron Lieber says: “Every conversation about money is also about values.” So embrace the awkward money conversation, but find out where it’s coming from first.

To learn more about having thoughtful money conversations with your kids, read Ron’s excellent book, The Opposite of Spoiled.

Where do their feelings about money come from? Friends? Media? Social media? Music?

If you’re not on that list, the answers might surprise or even shock you.

Have the “Why money?” conversation with your kids. Have it often. After all, the influences in a young person’s life change very rapidly.

Not sure what to emphasize? Today’s article includes some handy points.

Money can’t buy love, but a shortage can ruin relationships. Money related issues top the list of reasons for divorce. Caring about money helps you get on the same financial page with your partner.

Money can’t buy good luck, but it can bail you out of bad luck. As they say, “stuff” happens. When it does, you’ll probably need money to help fix it. Caring about money helps you set aside the funds you’ll need to rebound gracefully from life’s inevitable emergencies.

Money can’t buy happiness, but it can prevent a lot of unhappiness. Unhappiness is not being able to put food on the table or cover your other basic needs like clothing and shelter. Unhappiness is never being able to indulge in occasional “wants.” Unhappiness is dealing with late payments, overdraft fees, payday loans, bill collectors, or even bankruptcy. Caring about money helps you develop the skills and habits you’ll need to avoid financial stress.

Money can’t buy meaning, but it can give you the freedom to pursue it. Caring about money helps you build the financial reserves you’ll need to do what you want to do with your life. Without financial independence, you’ll remain beholden to someone else’s agenda.

Monday, April 18, 2016

Uh oh. Your kid is about to swallow a phishing attempt hook, line, and sinker.

Make sure your kid knows that any email, text message, or phone call asking for sensitive information is most likely fraud. Do not click. Do not call. Do not respond.

If the message is from an unknown source, has odd grammar or spelling, or makes a ridiculous offer from a Nigerian prince, coach your kid to just delete it.

Even if the message seems legitimate, coach your kids to look up the contact information for the institution separately. Look on the back of the card. Look at a recent account statement. Google the name. Then, contact the institution directly to see if there is a valid issue.

When it comes to communicating about sensitive information, make sure your kids are the ones casting the line, not the ones taking the bait.

The reality of money as an abstract number — beyond just physical cash and coins.

But setting up bank accounts for young kids can be a real hassle. There might be overdraft fees and other hidden gotchas too. And traditional savings accounts don’t pay enough interest to be remotely interesting.

So, try a simple spreadsheet instead. Today’s article shows how to open up your own little family bank in Google Docs with a handy template.

Retire the piggy bank. Open a family bank in a spreadsheet. Take your kid’s financial IQ to the next level.

Saturday, April 16, 2016

“OK, I get that some money comes out of my paycheck to pay for income tax, but what are these two other withholding boxes?”

“Oh, that’s FICA.”

“Who the heck is FICA?!”

Introduce your teen to FICA before that first paycheck arrives.

Here’s a quick bio:

FICA is the Federal Insurance Contributions Act — a federal law that requires a tax for Social Security and a tax for Medicare to be withheld from each paycheck.

FICA’s Social Security tax is 6.2%. So $6.20 will be pulled out of every $100 in your paycheck to help provide a safety net for retirees, the disabled, and children of deceased workers. Social Security was created in the 1930s following the Great Depression.

FICA’s Medicare tax is 1.45%. So $1.45 will be pulled out of every $100 in your paycheck to help provide hospital insurance benefits for the elderly. Medicare was created in the 1960s.

FICA taxes are matched by your employer. So workers and employers are both contributing to a piece of the social safety net.

Now your teen will know what to expect before meeting FICA for the first time.

Friday, April 15, 2016

Ask your teen this money math question: “Let’s suppose you make $40,000 of taxable income. That puts you in the 25% federal tax bracket. How much income tax do you pay the IRS?”

You’re likely to hear some reasoning like: “Well, that means 25% of $40,000 which would be $10,000. Right?”

“Wrong. Try $5,793!”

“Huh?”

Time to teach your teen how the progressive tax system works in the U.S.

The income you make is chopped into portions. The first portion is taxed at one rate — the lowest rate. The next portion is taxed at a higher rate. The next one a higher rate still. And so on. The ranges that define the sizes of each portion and the corresponding tax rates are known as tax brackets.

Here’s what the tax calculation looks like for our example:

Tax Bracket

Income Portion

Tax Owed on Portion

10%on first $0 to $9,225

$9,225

$922

15%on next $9,226 to $37,450

$28,225

$4,234

25%on next $37,451 to $90,750

$2,550

$637

TOTAL

$40,000

$5,793

The right-hand column shows the amount owed on each portion of income as each is taxed at a progressively higher rate. The total tax owed adds up to $5,793.

If we divide the total tax owed by the total taxable income of $40,000, we get 14.48%. That’s called the effective tax rate.

The rate in the highest tax bracket that applies to you is called your marginal tax rate. In this case, it’s 25%.

Key points to emphasize:

You pay different rates on different portions of your income — not just one rate.

Everybody pays the same tax rate on the first portion of income. Everybody pays the same higher rate on the second portion. And so on.

The highest rate that applies is your marginal tax rate. That’s the one most people talk about.

Your teen has no idea how a W-4 form affects tax withholding from a paycheck.

Teach your teen this key concept: entering more allowances on the W-4 means less taxes will be paid along the way. Enter too many allowances, and you could be staring at a big unexpected tax bill come April 15. Enter too few, and you could be seeing a tax refund instead. Exempt means no taxes will be withheld.

For a teen getting that first part-time job paying a few thousand dollars or less, 0 allowances or exempt is likely the way to go.

For a young single grad getting a first full-time job, it’s probably a 1 in the allowance box.

Eyes glazing over with this tricky tax talk? Just teach your teen this handy limerick:

There once was a dude named Theodore,
Who was totally baffled by his W-4.
Allowances sounded good,
So he entered more than he should.
Surprise! Now he owes taxes galore!

Sunday, April 10, 2016

“You can run into debt, but your have to crawl out.” ~American Proverb

Your teen just got that first credit card. Here’s the conversation you want to head off at the pass.

“Dad, I went a little crazy this month with that phone upgrade. I owe $500 on my credit card bill. Fortunately, I see I can just make a minimum payment of $20. Phew!!!”

No, not phew. More like pee-YOO. As in: that debt is gonna stink big time.

Ask your teen to guess how long it would take to pay off a $500 balance making just the minimum payments each month. Assume typical credit card terms. Let’s say 18.9% interest rate and 4% minimum payment.

The answer? Wait for it...

3 years and 8 months.

Oof. That’s almost as long as your teen will be in college. (Well, hopefully).

What if your teen paid a steady $20 every month instead of the minimum balance every time?

2 years and 9 months. Better, but still a crazy long time to a teen.

Of course, that assumes every other additional purchase on the card is fully paid off each cycle. Every. Single. One. Toss in a few unpaid purchases each month, and your teen will find credit card debt is a constant smelly companion.

That’s exactly how the story plays out. Time after time.

Change the story. Coach your teens to never make credit card purchases they can’t pay off at the end of the month. In full. When that credit card bill arrives, always pay as much as possible as soon as possible.

To make the message memorable, use this online calculator with your teen. Play with some scenarios. Have your teen plug in the price for an expensive item that’s all the rage. Check off the minimum payments option. Watch the chart expand. Minimum payment equals maximum damage.

Friday, April 8, 2016

“Don’t give your kid a credit card — or even a debit card — for as long as you possibly can.” ~Beth Kobliner

Many parents echo this cash-only mantra for kids. And Beth isn’t just “any parent.” She’s a personal finance commentator and journalist, author of Make Your Kid a Money Genius (Even If You’re Not), and a member of the President’s Advisory Council on Financial Capability.

“Protecting” your kids from non-cash forms of money only prolongs their ignorance. It’s a very dangerous ignorance. Consider that cash transactions will be a vanishingly small fraction of the financial reality your kids will be experiencing as young adults.

So take the time to explain to kids how all forms of money work. Demystify the “magic” of electronic payment. Give your kids hands-on experience with appropriate versions of the payment methods they’ll be using as adults. Your kids are smart. They’ll pick up on the concepts rapidly.

Sure, they’ll still make mistakes. But better to make those mistakes with this “magic money” early, while the repercussions are minimal. Later, those mistakes will be far more costly, if not debilitating.

And what about mindful spending? Turn on real time transaction alerts that report the remaining balance after every purchase. Instant awareness.

Don’t protect your kids from the more magical forms of money. Educate them.

Wednesday, April 6, 2016

“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where–” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“–so long as I get SOMEWHERE,” Alice added as an explanation.
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”(Alice’s Adventures in Wonderland, Chapter 6)

Like Alice in Wonderland, your youngster — not surprisingly — has no idea where she’s headed financially, or how to get there.

That’s where you come in.

Unlike the Cheshire Cat, you have a firm idea of what your child’s destination should be. Take the time to map out the waypoints — the key financial skills you’d like your child to learn along the journey from preschool through elementary, middle, and high school. Even onto college and beyond.

Don’t panic. You don’t have to get it right all up front. Adjust and fill in more detail along the way. The key is to be intentional about the path as early as possible. You’ll find the trip is over before you know it.

If you don’t map out your child’s financial journey ahead of time, she’ll end up down a financial rabbit hole that, more often than not, circles right back to your doorstep.

Check out the chart in today’s article. It compares what investors could have made by sticking with diversified long term investments versus what they actually made do to impulsive trading.

The average investor just doesn’t know how to leave well enough alone. They get worried when things start to look ugly, so they pick at their investments. The result? A failure to capture almost 1.8% of annualized total returns over 10 years. Over the long haul, that kind of gap can translate into bleeding away hundreds of thousands of dollars of potential earnings. Ouch.

So, teach your kids to leave those long term diversified investments alone. They’ll be rewarded with unblemished returns.

Sunday, April 3, 2016

Fewer and fewer students are holding down jobs while attending high school or college. That’s a shame.

Here are seven reasons part time work makes sense for your full time student:

Better grades. Research has shown that part time work can actually improve grades. Working students are often motivated to study harder. They know firsthand what kind of job they don’t want after graduating.

More effective time management. Kids with jobs are forced to allocate their time more efficiently. They also know the importance of showing up on time.

Stronger job prospects. Working kids have more to put on their resume. They also develop realistic expectations of workplace requirements and norms of behavior. The maturity comes across in an interview.

Less student debt. Working can defray everyday expenses and some college costs, like books. That translates to smaller student loans.

Smarter spending. Kids tend to spend their own precious funds judiciously. Mom and Dad’s money? Not so much.

Bursted bubbles. Minimum wage work environments don’t coddle students like parents and schools do. Working kids learn to deal with negative feedback.

Tax free investing. A working teen with qualifying W-2 income is eligible to open a Roth IRA where funds can grow tax free for decades. Offer to match your teen’s contributions if you can. More info here.

The bottom line: part-time job work doesn’t interfere with school work. It often enhances it.

Disclaimer

The content of FamilyFinanceFavs.com is for general information purposes only and does not constitute professional advice. Visitors to FamilyFinanceFavs.com should not act upon the content or information without first seeking appropriate professional advice.